By Steven K. Beckner
AUSTIN, Texas (MNI) – Dallas Federal Reserve Bank President Richard
Fisher nearly scoffed at the Federal Open Market Committee’s new
exercise in interest rate forecasting and advised markets to take the
Fed policymaking body’s extended “forward guidance” on the path of the
federal funds rate “with a big grain of salt.”
Far more important, in Fisher’s view, was the FOMC’s 2% inflation
target, coupled with its statement that it cannot target unemployment.
Fisher, though not a voting member of the Fed’s policymaking
Federal Open Market Committee this year, contributed to the new
three-year funds rate forecasts. But he called such forecasts largely
“guesswork” in remarks prepared for the Austin Headliners Club,
Last Wednesday, the FOMC reaffirmed its 0-25 basis point funds rate
target and said it now expects to keep it “exceptionally low” “at least
through late 2014.” The committee had previously said it expected to
keep the funds rate that low ’til at least mid-2013. That “forward
guidance” represents the consensus of the 10 FOMC voting members.
Accompanying charts revealing all of the FOMC participants’
predilections on the path of the funds rate showed 11 of the 17
projecting rate hikes coming in 2014 at the earliest — five in 2014,
four in 2015 and two in 2016. Only three saw the funds rate being raised
this year, and only two next year. By the end of 2014, 11 policymakers
expected the funds rate to be 1% or lower with six anticipating that
the rate will remain near zero.
Fisher, who opposed the “mid-2013″ language when it was adopted
last August, said he also “resisted” extending the zero rate period
through “late 2014.”
“Instead, I feel that the key should be to calibrate monetary
policy according to the state or condition of the economy e,” he said.
Of the three-year funds rate forecasts Fisher said, “Mind you,
these are not binding commitments. They are based on the assumption of
‘appropriate monetary policy’ and are, despite the best of intentions,
largely guesswork, especially looking out over a multiyear period.”
Fisher cautioned that “at best, the economic forecasts and
interest-rate projections of the FOMC are ultimately pure guesses.”
Quoting former Bank of England policymaker Charles Goodhart, Fisher
said, “I suggest that you simply take all this forward guidance and
forecasting a year or more out with a big grain of salt, bearing in mind
that the policy statements and forecasts issued by the FOMC are tactical
judgments of the moment, made within a broader strategic context.”
Fisher said the FOMC’s “most important announcement” was the 2%
inflation target, and he suggested that the absence of an unemployment
target was equally important.
“Explicitly acknowledging that monetary policy’s impact on
employment is transitory and uncertain is a cardinal event,” he said.
“It signals to the markets that there are limits to the ultimate
job-stoking efficacy of Federal Reserve policy.”
“To the extent that inflation is running below 2%, the Federal
Reserve may have somewhat greater latitude to pursue accommodation,” he
continued. “However, the past few years have demonstrated, yet again,
that allowing inflation to rise by no means guarantees faster job
growth.”
“The message to our nation’s fiscal authorities is that they cannot
expect monetary policy to substitute for the need to get their act
together, stop their shameful politicking, get on with putting their
fiscal and regulatory house in order and do so in a manner that
encourages rather than continually undermines job creation and economic
expansion,” he added.
As he often does, Fisher boasted of the Texas economy outperforming
the rest of the nation, and he made the point that it has the same
monetary policy as other states. Hence, he inferred, Texas is
benefitting from a more business-friendly political climate.
“The citizens of Texas and the Eleventh Federal Reserve District
operate under the same monetary policy as do the rest of our fellow
Americans,” he said. “We have the same mortgage rates, pay the same rate
of interest on commercial and consumer loans, and earn returns and
borrow at the same interest rates as do our brethren in the rest of the
country. Which raises an important question: If monetary policy is the
same here as everywhere else in the United States, why does Texas
outperform the rest?”
Fisher said one of the reasons for Texas’s performance, aside from
its resource wealth, is that “we have a Legislature, based here in
Austin, that under both Democrat and Republican governors has over time
crafted laws and regulations that encourage business expansion and job
creation.”
And quoting German finance minister, Wolfgang Schauble, he drew the
lesson that “‘if you want more private demand, you have to take people’s
angst away’ by having responsible and disciplined fiscal policy; and
second, that fiscal policy either complements monetary policy or retards
its effectiveness as a propellant for job creation.”
** Market News International **
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